Stock investors have a choice: One, they can make their investment decisions based on influencing factors, which depend on the ever-changing daily news flow (such as the latest tweet from U.S. President Donald Trump, the often unpredictable outcome of the next elections in any major country, or about trouble spots, in which difficult characters are involved, for example in the case of North Korea).
The second option is to focus on more important long-term issues and trends where there is a higher level of predictability.
At Credit Suisse the research specialists around Global Chief Investment Officer Michael Strobaek have clearly made up their mind on this issue. In their opinion, long-term thematic investments definitely help to profit from the predictability and sustainability of multiyear trends. These themes link long-term trends like the political change in Western countries, demographic shifts or rapid technological progress to concrete investment opportunities geared to the long-term. They provide a tangible link between today’s major developments and investors´ portfolios, and according to Strobaek, can improve the risk and return profile of portfolios in the long run.
The experts at the Swiss private bank have identified five supertrends as long-term themes that they expect to provide attractive investment opportunities in the years ahead:
- Angry Societies – Multipolar world
- Infrastructure – Closing the gap
- Technology at the service of humans
- Silver Economy – Investing for population aging
- Millennials’ values.
- Angry Societies – Multipolar world
Credit Suisse Head of Global Equity Research Reto Hess reminds investors that since the financial crisis of 2008, inequalities have grown – not so much across countries but within them, and especially in the developed world. The economic policy mix of fiscal austerity and loose monetary policy proved particularly detrimental to the Western middle class. Tough labor market conditions following the economic recession were exacerbated by hyper-globalization and disruptive technologies.
This combination left many middle class households permanently worse off after the crisis. That same middle class grew more and more frustrated about the apparent incapability of the political establishment to deal with key problems such as seemingly uncontrolled migration and the rise of terrorism. This led citizens across the developed world to mobilize to drive political change, the results of which have become increasingly apparent. Newly elected governments have strong popular mandates. Therefore, the next four to seven years are likely to bring about economic policy measures aimed at appeasing the Western middle class in the developed markets.
From an investor’s point of view, Hess recommends focusing on security and defense, consumption (national champions and brands) and emerging markets consumers. Credit Suisse’s “buy” recommendations in these areas include Caterpillar, HP, Nike, General Dynamics, Raytheon and Samsung Electronics.
Infrastructure – Closing the gap
Materials Equity Research Analyst Dan Scott explains that Credit Suisse already identified infrastructure in August 2016 as an attractive long-term investment theme. The rationale was that the effects of unconventional monetary policy were wearing off, and there was an increasing consensus that a mix of expansive monetary policy and fiscal policy was needed to get out of the global gloom trap. After all, infrastructure expenditures typically lead to job creation, and they are a strong economic multiplier, leading to productivity gains. With real rates in many parts of the world still negative, the environment is ideal to fund infrastructure projects.
There are multiple ways to gain exposure to infrastructure investments, depending on investors’ risk appetite and tolerance of illiquidity. The most straightforward route for private investors is to focus on sectors and companies that would benefit from a policy focus on infrastructure, screen them against their company fundamentals and invest in those stocks that are most attractive. Against this background Scott believes that infrastructure investments in listed equities (in particular transport infrastructure, water and energy infrastructure and affordable housing) remain interesting on a global basis.
However, valuations of most equities exposed to infrastructure spending now largely capture their potential, and further investing requires a focused approach. Credit Suisse sees direct equity participation in commercial infrastructure projects as particularly interesting for long-term institutional investors like pension funds. However, specialist knowledge is key for Scott, given several risks and challenges. “Buy” recommendations in these fields include Ingersoll-Rand, Johnson Controls, Danaher, Fortive, Cummins and Parker Hannifin.
Technology at the service of humans
Telecom and Information Technology Equity Research Analyst Uwe Neumann starts his comments about the third supertrend by reminding that in recent years, technology has increasingly been regarded as a threat, with cheap robots, algorithms and programs seen as eliminating jobs and making human talent redundant. Yet he believes it is essential to remember that there is also a good side to technology, and that technology and innovation also help make workplaces safer, increase productivity and provide better products and services for people. In general, Credit Suisse believes that digitalization is here to stay. In the coming years, the big winners are likely to be so-called digitizers that offer sales growth and rising operating margins owing to economies of scale and efficiency. Internet platform companies in particular should continue to be the major beneficiaries. They constantly innovate to cater to the structural shift toward more enriching online experiences. Furthermore, web advertising agencies, companies that create new ecosystems based on the Internet of Things and cloud computing should gain in the long term.
Digitalization also has negative sides, with data theft a prominent risk. In this respect, cybersecurity will most likely continue to be among the most resilient areas of IT spending. Also, the exponentially growing flood of data that is automatically stored might lead to increasing costs. This could be a growing area of new business for companies that help to qualify, manage and clean data storage.
In addition, digitalization provides equally compelling opportunities in non-IT sectors. The need to innovate and increase operational efficiency is going to drive long-term trends such as big data, Internet of Things and virtual world. Technologies like virtual reality (VR)/augmented reality (AR), Internet of Things and robotics offer tremendous opportunities in this regard. However, the power to innovate is highly dependent on incremental investments that companies make to become digital. Any macroeconomic weakness could impact IT spending and investments in innovation, which, in turn, could dampen growth. Therefore, it is essential to follow a disciplined life-cycle management of investments in digitizers and preferably use managed investment products. The stock selection for this category includes Activision Blizzard, Facebook, Alphabet, Amazon, Microsoft, Nvidia and Thermo Fisher.
Silver Economy – Investing for population aging
Healthcare Equity Research Analyst Lorenzo Biasio says a tidal demographic change awaits us globally in the next three decades. By 2050, it is estimated that the population aged 60+ will rise to 2.1 billion from 900 million in 2015. By 2020, the spending power of people aged 60+ will reach an estimated US$15 trillion. According to Biasio, we are ill-equipped to grasp this development’s magnitude in terms of the shift in societal composition, given the accelerating aging trajectory. Credit Suisse expects that the addition of more than a billion senior citizens by 2050 and an associated drop in the dependency ratio will pose immense challenges, but also opportunities.
In the view of the Swiss bank, investors positioned along the continuum of senior citizens’ wants and needs are likely to witness attractive returns, especially in areas like senior lifestyle and consumption (rising share of income compared with other demographic groups and increasingly high spending power), healthcare (many chronic diseases increase with age), real estate – senior housing (appropriate to the health and living conditions of the elderly) and senior funding (population aging and rising longevity are likely to raise demand for life insurance products). The selection of stocks here includes Blackrock, Blackstone, Carnival, Estee Lauder, Eli Lilly and Pfizer.
All one needs to know here is that 50 percent of the world’s population is under the age of 30, and the values of this generation are set to become the new norm. The term “Millennials” (or “Generation Y”) refers to those 19–35 years of age, and “Generation Z” refers to those under 19. Consumer Discretionary Equity Research Analyst Julie Saussier-Clement refers to them simply as millennials, a cohort whose behavioral tendencies have been the subject of extensive research in recent years.
Millennials are one of the largest generations in history. They are influential and will soon reach maturity as investors. Investment themes connected with this generation are sustainable investments (millennials are the most sustainability-conscious generation and are willing to pay more for products and services seen as sustainable), clean energy (millennials worry about the future of the environment and feel responsible for it), impact investments (millennials are willing to support enterprises that generate a positive social and/or environmental impact), and a “fingertips” experience (millennials have been brought up in an era driven by technological advances). When it comes to consumption, they favor technology brands (fun, health and leisure); and in housing, they favor alternative forms (such as singles living in micro apartments). The stock selection for here includes Apple, Monster Beverages, Salesforce.com, Texas Instruments, Albemarle and General Electric.